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Economist El-Erian: Fed now has no choice but to cut rates or risk disrupting markets

Key Points
  • If the Fed doesn't cut its benchmark federal funds rate, it risks further disrupting the stock market, economist Mohamed El-Erian says.
  • Central bankers are being "held hostage" by markets, he adds.
VIDEO7:5607:56
Allianz chief economic advisor El-Erian on today's market sell-off

The Federal Reserve has "no choice" but to cut interest rates again at its September policy meeting, economist Mohamed El-Erian told CNBC on Wednesday.

If the Fed doesn't cut its benchmark federal funds rate, it risks further disrupting the stock market, Allianz's chief economic advisor said in an interview on "Closing Bell. "

Central bankers are being "held hostage" by markets, El-Erian continued. "The market is going to push the Fed to do 50 basis points. Some are saying, 'Why not even do an emergency cut?'"

El-Erian spoke after the Dow Jones Industrial Average closed down 800 points on Wednesday. It was its worst performance of 2019. The spread between the U.S. 10-year note and 2-year note inverted, a signal investors take as a recession indicator.

President Donald Trump on Wednesday once again blamed the Fed for mounting fears about a slowing U.S. economy. The president has blamed the central bank for previous declines in the stock market and has repeatedly pushed Fed Chairman Jerome Powell to cut rates.

The fed funds futures market now points to a 100% probability that there will be another Fed cut in September, according to the CME FedWatch Tool. Last month, the Fed, as expected, cut rates for the first time in more than a decade.

But El-Erian, former CEO and co-CIO of Pimco, said the rate cuts come with a price. "The more it cuts, the less impact it has on the economy, the less impact it has on markets and the greater the risk they have no ammunition when they will really need to cut."

El-Erian has been more bullish on the U.S. economy than some other major analysts, telling CNBC in March that the country will not see a recession this year or in 2020 barring a major policy mistake from the Fed.